Bloomberg News

Treasury Bonds Drop Before Fed Announcement, Snap Three-Day Gain

September 21, 2011

Sept. 21 (Bloomberg) -- Treasury 30-year bonds fell for the first time in four days on speculation investors who bet the Federal Reserve would buy longer-maturity debt to boost the economy are poised to exit those trades for a profit.

Ten-year yields climbed from within seven basis points of a record low before the Fed releases its policy statement at the end of a two-day meeting today. The central bank is likely to say it will buy longer-term debt to spur investment in riskier assets in a move dubbed Operation Twist, said Pacific Investment Management Co.’s Tony Crescenzi. Treasuries fell 0.7 percent in November 2010 after the Fed last expanded its asset-purchase program, Bank of America Merrill Lynch Indexes show,

“For a couple of weeks, Operation Twist has been getting priced in,” said Peter Chatwell, a bond strategist at Credit Agricole Corporate & Investment Bank in London. “If and when it gets announced, a significant proportion of investors will take that trade off and that will push long-end yields higher.”

The yield on the 30-year bond climbed four basis points to 3.24 percent at 6:56 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent security due in August 2041 fell 3/4, or $7.50 per $1,000 face amount, to 109 21/32.

The 10-year rate rose two basis points to 1.96 percent, after falling to 1.94 percent today, approaching the record low of 1.877 percent set Sept. 12.

The Fed will decide to replace short-term Treasuries in its $1.65 trillion portfolio with longer-maturity bonds, according to 71 percent of 42 economists surveyed by Bloomberg News. Operation Twist is among policy tools that Chairman Ben S. Bernanke has said the Fed could use as risks to the U.S. recovery increase.

‘Leap of Faith’

Bernanke will aim “to spur investors to take a leap of faith and believe that the U.S. economy will avoid a double-dip and instead achieve sustainable growth,” Pimco’s Crescenzi, who is based in Newport Beach, California, wrote in an e-mail yesterday. “The Fed’s menu of options for stimulating economic growth is shrinking,” so it will opt to extend the average maturity of its debt holdings, he said.

Fed policy makers said on Nov. 3 the central bank would expand asset purchases through its so-called quantitative-easing program to about $75 billion a month until June. The 10-year yield rose to 3.29 percent on Dec. 31 from 2.57 percent on Nov. 3 on optimism the measures would boost economic growth.

“If the QE is successful, yields go up and steepen, which is what we saw in previous rounds,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “The market seems to expect bold action.”

Spread Widens

The difference in yield, or spread, between two- and 30- year securities widened five basis points to 309 basis points, or 3.09 percentage points. It shrank to 299 basis points on Sept. 6, the narrowest since August 2010.

The International Monetary Fund cut its forecast for global growth yesterday and predicted repercussions if Europe fails to contain its debt crisis or U.S. politicians become deadlocked over fiscal plans. Greek Prime Minister George Papandreou is pressing for accelerated budget cuts to ensure the next tranche of an international rescue package is delivered next month to stave off default. U.S. President Barack Obama is asking Congress to approve a $447 billion job-creation plan.

Republican lawmakers urged Bernanke to refrain from additional monetary easing in a letter signed by Senate Minority Leader Mitch McConnell, House Speaker John Boehner, Senator Jon Kyl and House Majority Leader Eric Cantor.

“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” they wrote in the Sept. 19 letter.

‘Heavy Handed’

Senator Charles Schumer, a Democrat from New York, called the note “a heavy-handed attempt to meddle in the Fed’s independent stewardship of monetary policy” and said it should be “ignored by Chairman Bernanke and the Fed’s policy makers.”

The 10-year yield will advance to 2.96 percent by the end of September 2012, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

Treasuries have returned 8.5 percent this year, headed for the best return since 2008 during the last U.S. recession, the Bank of America Merrill Lynch indexes show.

--With assistance from Michael Heath in Sydney. Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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